- Beware of August Blues

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Beware of August Blues

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Beware of August Blues

Thursday, 23 August 2007

Well, maybe not. Back to this weekend. The “thing” that’s missing in the reporting of the recent correction is a psychological perspective. You see, the 10-percent correction took the SPX into the red for the year.
That’s right, all of the hard work that investors had done to achieve CD-beating results were wiped clean. We’re back to “square one.” This is much more than a simple correction. It’s a huge event from an investor’s psychological view.

While seeing year-to-date returns wiped out is certainly nothing new, we’re used to it occurring earlier in the year. This year, for example, the SPX dipped into negative territory during the March pullback. While investors don’t like to see three months of work go down the tube, it’s not unusual during the first quarter.

Negative returns in August, on the other hand, are a different story. Going back to 1950, there have been only three Augusts in which the market has seen year-to-date profits of more than six percent wiped out. More importantly, each of these three years saw further difficulties after the August drops.

And one of these years is a little too similar to the current market environment.

The last year that saw August relinquish year-to-date profits was 1998, a year that has been brought up many times over the past few weeks because of some striking similarities to today. Concerns around the financials, technical weakness, and talk of the need for the FOMC to bail out the market were all prevalent during the pullback in 1998.

And it’s no surprise that the hedge fund industry (remember Long Term Capital Management?) evoked much of the 1998 pain, as the market found out just how badly a heavily leveraged portfolio can work against investors.

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My advice today is the same as in 1998. Patience remains one of the most valuable traits of any successful investor. The recent lows are likely to be re-tested, as investors appear a little too confident that the market has shifted back into bull mode. Buying opportunities have a way of giving investors multiple chances during these longer-term bottoms.

Have a great trading week.

CJ

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